2018 (12) TMI 530 - HC - Income Tax

Disallowing the business expenditure claimed as incurred for the higher education abroad of the son of a Director of the assessee company, who was also the Managing Director of a subsidiary company and who was later appointed as a Director of the assessee company itself - Held that - Here the son of the Director of the assessee company, send for higher studies was a Managing Director in one subsidiary company. Definitely the subsidiary company could have claimed the expenditure as business expenditure, but, not the assessee Company. The contention raised, based on the resolution passed by the subsidiary company at Annexure B cannot be upheld. Annexure B resolution indicates that the subsidiary company had agreed to lend the person on deputation basis after his study in USA to the assessee company for a period of ten years. The decision taken by the subsidiary company does not bind the holding company. There is also no resolution seen of the holding company, deciding to send the Managing Director of the subsidiary company for higher studies and then take him into the fold of the holding company itself, by reason only of the education he acquired in the foreign country. The further resolution at Annexure C is by the assessee company wherein the Board merely agreed to reimburse the expenses. This again would be only by reason of love and affection the Board Members have, towards the person deputed especially noticing the fact that it is a closely held private limited company wherein all the Directors are siblings or closely related. - Decided in favour of the revenue.

Summary

Issues:
1. Disallowance of business expenditure for higher education abroad.
2. Interpretation of precedents from different High Courts.
3. Accounting treatment of expenditure and liability accrual.

Issue 1: Disallowance of business expenditure for higher education abroad:
The case involved a publishing company that sent the son of a director for higher studies in the USA, who was later appointed as a director in the company. The company sought reimbursement under Section 37 of the Income Tax Act, which was initially disallowed by the Assessing Officer but later allowed by the First Appellate Authority. The Tribunal, however, disallowed the claim. The Tribunal distinguished a Madhya Pradesh High Court judgment and relied on a Madras High Court decision. The Madras High Court's decision emphasized that the expenditure incurred for higher studies abroad could not be claimed as a business expenditure solely because the individual later joined the company as a director. The Court agreed with the Tribunal's decision, noting that the person sent for studies was unconnected with the assessee company, unlike in other cases where the individuals were directly involved in the business.

Issue 2: Interpretation of precedents from different High Courts:
The Tribunal's decision was influenced by the contrasting judgments of different High Courts. The Madhya Pradesh High Court case involved sending a partner for higher studies, and the Tribunal allowed the expenses as business expenditure. In contrast, the Madras High Court case dealt with a director sending his son for education abroad, and the court held that the expenditure could not be claimed as a business expense based on the relationship alone. The Court agreed with the Tribunal's alignment with the Madras High Court's reasoning, emphasizing the lack of a direct business connection between the individual sent for studies and the assessee company.

Issue 3: Accounting treatment of expenditure and liability accrual:
The Court examined the resolutions passed by the subsidiary company and the assessee company regarding the reimbursement of expenses for higher studies. It was noted that the subsidiary company's resolution to lend the individual to the assessee company after studies did not bind the holding company. The Court emphasized that the reimbursement decision by the assessee company was based on personal affection and not a formal business arrangement. Given the closely held nature of the company and the familial relationships among directors, the Court upheld the Tribunal's decision to disallow the claim. The Court concluded by ruling in favor of the revenue on the first two issues and dismissed the appeal, stating that the third issue did not arise for consideration.

This detailed analysis of the judgment from the Kerala High Court provides a comprehensive understanding of the legal issues involved and the Court's reasoning in deciding the case.